Personal Budgeting - Why it doesn't work
For most people money comes in and it goes out just as quickly. We have all tried to budget at some point in time and probably failed miserably for the same reasons most people fail at dieting. (Me included). When we attempt to budget in a traditional sense, we are forced to sacrifice items we think we can do without or don’t need now. As part of human nature we want it all and we want it now. As a result, we can feel frustrated and hardly done by. So, to make ourselves feel better we convince ourselves it really is that important and go out and spend money anyway.
Before long we’re living from pay to pay again with the budget being ignored in a vertical file somewhere well out of harm’s way.
Then when we get a bill that has to be paid and there is nothing left in the bank account to pay it with, the thought process goes along the lines of, “she’ll be right mate, I’ll whack it on the credit card” and figure out how to deal with it next month. Then when you get the credit card statement and you realise you are going further into debt you phone a mate and go for a beer or buy a pair of shoes to make yourself feel better, the cost of which also goes on the credit card. Hey, I’ve been there done all of that (except for the shoes) and a lot worse. Then if the pain is big enough you might be tempted to drag the budget back out and repeat the process just to make yourself feel really good. Is it any wonder so few people get ahead financially?
Personal budgets are for the most part a waste of time and potentially do more harm than good!
The alternative is far less time consuming, a lot simpler and will go a long way to make you feel good about yourself. It’s so simple that you won’t believe it works but I dare you to give it a try for say three months and let me know how you go with it.
In your mind make $1,000 your zero account balance (or some other round number, you decide). If you can make this mental change you will already be well on your way to personal budgeting that works.
Here is how it works. Start with $1,000 dollars in your account. For some people even saving this amount will be a struggle. It will involve only paying for the bare essentials to keep a roof over your head. Minimum amounts on any debt and really thinking about what you are spending. Once you have your $1,000 zero account, you transfer in once a month at the same time each month 1/12th of the amount you are prepared to spend each year. This transfer should be a regular direct debit from the account your pay gets put in. For this process to work the $1,000 zero account has to be separate from your savings account and very separate from your offset account if you have one.
All your living expenses come out of your $1,000 zero account including the minimum debt payments, insurance school fees etc. By the end of the month you will either be left with more than or less than the $1,000 your started with. It’s that simple. Each month you know if you have spent more than you have budgeted for. Don’t be surprised if the balance falls below $1,000. Unforeseen bills happen. The idea is there is no going back to savings or the credit card for a top up. There is no hiding the fact the budget has been blown for that month and if you go down the same path next month, you will be in overdraft to yourself for a similar amount.
What happens almost at a subconscious level is that you will start challenging yourself to get back to the $1,000 zero level. It almost becomes a game. Keeping that account above $1,000 means after all you are getting ahead financially. Without even thinking about it, you’ll start to question if you really need to buy that coffee every morning on the way to work. In effect, you’ll look at your discretionary spending in a different light.
Suddenly almost effortlessly you find yourself spending less and earning more which is after all the most predictable way of getting ahead financially. It also gets that voice out of your head which says, “its ok to use the credit card to fund any shortfalls, its someone else’s money anyway and there is always tomorrow to figure out I will pay it off”.
If there is more than $1,000 at the end of the month, terrific! It means you’ve a got a buffer for next month when the council rates are due (for example). If the amount in your $1,000 zero account is consistently getting bigger at the end of each month, even better. Now you have options.
Additional debt repayments, more super contributions, accelerating your wealth accumulation efforts generally. Or you just might decide to treat yourself.
Instead of focusing on what you don’t have (which is what traditional budgeting encourages you to do) your sub conscious brain will be trying to figure out ways of getting your account balance back up to the $1,000 at the end of the month. Once you are at the point of consistently having a surplus $1,000 account balance at the end of the month you will be a huge step closer to financial certainty.
If you are working with someone towards financial goals this idea gives you the perfect opportunity to stop blaming each other for not sticking to the budget and to come together to find ways of keeping the $1,000 zero balance. You will have an opportunity to get back on the same side. I know from personal experience that throwing the traditional budget out whilst addressing over spending has the potential to save relationships. Replace the traditional budget with the $1,000 Zero bank account and feel good about achieving something together.
Give it go and let me know how it works for you.
One of the things I haven’t dwelt on here is that it is good to know what you are spending money on. It provides your subconscious something to work on when targeting the $1,000 zero account balance. These days we have excellent free tools to make this a quick and easy task. Let us know you are interested in establishing your $1,000 Zero Account and we will point you in the right direction.
Getting on the right track and staying there is so important when it comes to financial certainty. It’s what we help our clients achieve. Speak to us about getting some expert assistance.